Daily Archives: March 22, 2011

It would be better for sizable eurozone bail-outs to occur after July 2013. This is the implication of a strange state of affairs in Brussels: namely that policymakers have agreed how to fund the future ESM to its full value, but not its predecessor, the EFSF.

Only about €250bn of the existing €440bn European Financial Stability Facility is available to bail out beleaguered eurozone sovereigns. This is because the fund wants to lend with an AAA rating, but several contributing eurozone sovereigns are rated lower. Increasing the rating is achieved, in effect, by overcollateralising each loan. Now it has been agreed to increase the lending capacity of the EFSF, but no word yet as to how. Apparently, further overcollateralisation has been ruled out: according to Citi’s Jurgen Michels, the lending capacity of the eurozone’s transitional measures (currently the EFSF and EFSM) shall never exceed €500bn.

The ban on further overcollateralising the rescue fund might seem odd, since that is partly the solution agreed for the European Stability Mechanism. Read more

Hong Kong’s yuan market is set to receive a boost from China’s central bank. The People’s Bank of China plans to raise the territory’s yuan clearing rate and is considering an increase in deposit rate, too, Reuters reports. Rates in Hong Kong are significantly lower than they are on the mainland, and unnamed sources quoted by the news agency say the planned moves are unlikely to align rates in one step. 

An increase in deposit rates would encourage companies to leave yuan in Hong Kong rather than sending them back to the mainland. Analysts also expect an increase in the supply of yuan bonds as investors hope for higher yields on forthcoming issues. From Reuters: Read more

Ralph Atkins

The “Will-they? Won’t they?” debate continues… On Monday, Jean-Claude Trichet, European Central Bank president, gave a pretty big hint that a quarter percentage point interest rate rise was still on the cards for April, in spite of events in Japan and Libya. He had “nothing to add” to his comments on the matter earlier this month, he told the European Parliament.

In an interview just released by Japan’s Nikkei newspaper, Jürgen Stark, ECB executive board member, has added quite a lot - but not necessarily provided further clarification. Read more

We all know that the Bank of England and other authorities have persistently been surprised by the strength of UK inflation and this chart shows just how extensive the surprise has been. As inflation hit 4.4 per cent in February, again above expectations, the chart shows the price level and successive Bank forecasts of the price level. As you can see, except for the unexpected cut in value added tax in 2009, since 2007, the Bank has persistently believed prices would be lower in the future than they have turned out to be.

The Bank of England’s dilemma just got worse. The ONS has announced annual prices rose 4.4 per cent in the year to February, up from 4 per cent in the year to January and considerably above the Bank’s 2 per cent target.

The 0.7 per cent month-on-month rise takes UK inflation to its highest level for nearly two and a half years. Read more